C Corp vs S Corp

(Originally posted 01/19/2018)

A question we often hear from owners of small to medium sized businesses is, Which should I choose, a C Corporation or an S Corporation? Your attorney might have a compelling reason to choose one over the other. But in light of the new tax laws, here is a simple comparison of the numbers.

In both cases, we’re assuming $500,000 of net revenue from the company, you pay yourself $10,000 a month, and you’re married.

First, the C Corp:

With the new tax law, 21% tax on $500,000 would be $105,000, so your after tax earnings would be $395,000 which you’ll take out as a qualified dividend.

You paid yourself $120,000 (Individual Shareholder Wages). Your Adjusted Gross Income with the Qualified Dividend would be $515,000.

The standard deduction on your wages is $24,000. Tax on $96,000 wages would be $12,999.

Tax on the $395,000 Qualified Dividend would be $59,250.

Your total tax on your personal tax return would be $72,249.

Add that to the $105,000 you paid on your corporate return and your total tax on $620,000 would be $177,249. An effective rate of 28.6%

Now, let’s look at the same scenario with an S Corp:

With an S Corp, Income Passes Through to Your Personal Income Tax

Net Taxable Income from the corporation is $500,000. But, you can take a 20% pass-through deduction up to 50% of your wages, so you can deduct $60,000.

The total income from the pass through is $440,000, which you would add to your $120,000 wages. Your Adjusted Gross Income totals $560,000.

After the standard $24,000 deduction, you’ll have $536,000 taxable income on which you’d pay $138,979. An effective rate of 22.4%.

Bottom line for this small business owner: An S Corp would save you $38,270 over a C Corp.